Japan's Nikkei index falls 11% in 2007, first loss in 5 years

Japan's stock market wrapped up a year of jittery trade with a sharp fall Friday, beset by fears about the U.S. economy and worries that global political instability will follow the assassination of Pakistani opposition leader Benazir Bhutto.

The Nikkei 225 index fell 256.91 points, or 1.7%, to 15,307.78 points, closing at the end of the morning session on the final day of 2007 trading.

It's the first time in five years the benchmark ended a year lower than the previous year's close. The Nikkei lost 1,918.05 points, or 11.1%, for the year. In 2006 the benchmark Nikkei gained 6.9%,

The death of Bhutto in Pakistan on Thursday, just ahead of Jan. 8 elections, sent shock waves through global markets because it heightened concerns about stability in the volatile region.

Motomi Hiratsuka, head of portfolio trading at BNP Paribas in Tokyo, said Tokyo shares were hurt by Bhutto's death, which came on top of growing worries about the U.S. economy.

"People are thinking about how global political turmoil may affect growth," Hiratsuka told Dow Jones Newswires.

Also, Japan's market hasn't shaken doubts about the American economy amid the subprime mortgage crisis. Any slowdown in the U.S. is likely to damage Japan's export-dependent economy.

A report from Goldman Sachs that said write-downs at U.S. banks, including Citigroup, Merrill Lynch and JPMorgan Chase, may deepen, helped to squelch investor momentum.

Overnight, Wall Street dipped over the economic and stability concerns, with the Dow Jones industrial average dropping 1.4% to 13,359.6.

Expectations that political instability from Bhutto's assassination will weigh on the U.S. dollar was another factor souring sentiment, said Kenichiro Yoshida, senior economist at Mizuho Research Institute in Tokyo.

The dollar was trading at 113.41 early afternoon, down from 113.69 yen late Thursday in New York. Earnings of major Japanese exporters are eroded by a higher yen, which also makes their goods more expensive and less competitive in overseas markets.

The dollar has lost about 5% against the yen for the year.

"A pessimistic view is prevalent about the Nikkei," said Yoshida. "Looking ahead to next year, we must keep our eyes on Wall Street."

Yoshida said the Nikkei is likely to stagnate during the first half of 2008 but has a chance of recovering once the U.S. credit crunch settles down later in the year. In a worst-case scenario the credit troubles won't go away, he said.

The broader Topix index, which includes all shares on the exchange's first section, lost 24.26 points, or 1.62%, to end the year at 1,475.68.

Japanese markets closed out 2007 with ceremonial celebratory clapping at the Tokyo Stock Exchange, as is customary every year. Trade is scheduled to reopen Jan. 4 for a half-day session.